Compare Home Equity Lines of Credit (HELOCs)

If you’re looking to renovate, finance a large expense or start chipping away at your bucket list faster, a home equity line of credit (HELOC) could be a strong option. HELOCs allow you to use the equity you’ve built up in your home like a line of credit. Knowing how they work and what to look out for can mean the difference between reaching your goals and getting into financial hot water.

What is a home equity line of credit?

A home equity line of credit — or HELOC — is a financial product that allows you to borrow against the equity you’ve built in a property you own.

A HELOC is similar to a loan in that you and your lender agree on how much equity you can borrow and the deadline for you paying it back. You use your loan as a line of credit, drawing from the balance as you need it and repaying what you owe plus interest. The lender typically sets the initial limit of your credit line using similar criteria to a regular home loan.

Your property acts as collateral for your line of credit, which means if you don’t pay back the loan, the lender can repossess or sell your property.

How does a HELOC work?

Calculate your estimated HELOC amount

For a general idea of the HELOC amount you might see approval for, you’ll need to do the following:

1. Determine your home’s current value. If you need help finding a general idea of what your house is worth, turn to online real estate listing sites. Many offer estimates by address to entice you to put your house on the market.
2. Find out how much you still owe on your current mortgage. Log in to your mortgage account to see the current balance on your loan, or call your loan provider.
3. Calculate your LTV ratio. Divide your mortgage balance by your home’s value. For example: $125,000 (mortgage balance) / $175,000 (home value) = 0.71. Using the calculation, the LTV ratio is 71% — which is an eligible LTV ratio for many lenders. Most banks look for an LTV ratio of less than 80% for approval.
4. Calculate 80% of your home’s value. Most lenders allow you to borrow up to 80% of your home’s value — less what you owe on your mortgage. For example: $175,000 * .8 = $140,000.
5. Determine how much a lender may let you borrow. Using the above calculation, your typical lender may allow you to borrow up to $140,000. But first, you must subtract the oustanding balance of your mortgage from that figure: $140,000 – $125,000 = $15,000.

Use our free HELOC calculator to determine how much you might be approved for.

How do I compare HELOCs?

Not all HELOC lenders are created equal. Here’s how to compare HELOCs during your search:

1. Check the lenders’ advertised rates. A HELOC’s interest rate is generally a base rate that’s determined by the market plus a margin that becomes the lender’s profit. The margin you’ll pay varies by lender but is ultimately what results in a higher or lower interest rate.
2. Look at each lender’s fees. Most HELOCs come with annual fees, while some lenders also charge early termination, inactivity and other fees.
3. Pay attention to the fine print. Review the HELOC’s draw and repayment periods to make sure they fit your timeline and financial goals. Draw periods can last as long as 10 years, while repayment periods can extend to 20 years.

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How do I apply for a HELOC?

You must own a home and be at least 18 years old to get started:

1. Find a HELOC lender.Find the best HELOC lender by comparing interest rates, fees, customer reviews and requirements from two or more lenders.
2. Complete an application. Look for lenders that allow you to at least start your application online. You may need to speak to a loan officer over the phone or at a local branch to complete the process.
3. Submit documentation. To verify your personal and financial information, you’ll likely submit proof of income, paperwork that confirms the outstanding balance on your mortgage and contracts that show the purchase date and price of your home.
4. Get your appraisal and title report. Your lender will order an appraisal to learn the estimated market value of your home. The title confirms you own the property and reveals any claims against it.
5. Close on your HELOC. You’ll pay any closing costs, sign documents and decide how you to access your funds.

Expect to submit a range documentation to confirm your personal and financial details:

HELOC requirements

Eligibility varies by lender but typically requires:

• An existing mortgage with 15% to 20% home equity
• A credit score of at least 620
• A debt-to-income (DTI) ratio of less than 43%
• A combined loan-to-value ratio of 85% or less

HELOC costs and fees

The range of fees you might encounter with a HELOC are similar to those that come with getting a mortgage, like application and closing fees. Not all lenders charge the same fees, and you’ll want to read your list of fees carefully to, for instance, avoid paying both a transaction and an inactivity fee — basically fees for both using your HELOC and not using it.

What can I use a HELOC for?

Most lenders allow you to borrow against your equity for any legitimate purpose. You aren’t required to disclose what you’ll use the money for — simply withdraw funds from your HELOC account when you need them. HELOCs are best for short-term borrowing when you don’t know exactly how much you’ll need.

Homeowners typically use home equity lines of credit to:

• Finance a vacation
• Renovate a home or make large-scale repairs
• Pay down a mortgage balance or consolidate other debt
• Pay bills
• Buy a new car
• Pay a child’s college tuition

Case study: Leah's experience

Leah Fallon

Copy Editor

When we decided to finish our basement, we knew we needed to pay for it by taking advantage of the equity we’d built in our home after paying down our mortgage for five years.

We took out a HELOC we could use for anything with a higher credit line than we needed to make the renovations. Since we were stuck with a high APR on some credit card debt, we decided to roll this into our low-rate HELOC as well.

As we started our renovations, we wrote checks from our HELOC account to pay the contractors. We learned quickly that paying the minimum balance only covered the interest, so we made sure to increase our payments when we could.

Our HELOC came with a fixed 2.99% APR for the first year and then jumped to a variable rate thereafter. We planned to pay off as much as we could that first year to cut the balance in half by the second year. And our loan officer offered to refinance the loan to a fixed rate after the first year, too — as long as we had enough equity in our home.

Overall, we found that a HELOC was an easy and affordable way to get money for our growing family home.

Pros and cons

Should I take out a HELOC?

If you’re thinking of taking out a HELOC, you should consider whether:

• You have the discipline to stick to a budget.
• You have not borrowed against equity that has been calculated on an inflated price.
• You have the restraint to not use all the funds at once.
• You have a cash buffer to protect yourself from rising interest rates.

Tips for managing a HELOC

There’s a lot to think about when considering a home loan, no matter what type you’d like to get and what you intend to use the funds for.

Here are some tips to keep in mind:

• Minimize the amount of interest payable on your HELOC by making payments on the principal during the draw period.
• Don’t withdraw more funds than you need.
• Compare a range of HELOCs to ensure you’re getting a competitive deal.
• Keep at least 20% equity in your home in case house prices fall.

HELOC alternatives

If you don’t qualify for a HELOC, other options may allow you to tap into the equity you’ve built in your property

• HELOC vs. home equity loan
• HELOC vs. reverse mortgage
• Home equity loan vs. cash-out refinance

Bottom line

A home equity line of credit can provide you with funds to renovate your home, buy a new one, start a business or simply knock another goal off your list. Before applying, budget what you can pay toward repayments and a plan of attack for repaying what you owe. And understand the consequences of what can happen if you fail to pay it back — including losing your home.

Common questions about HELOCs

• What credit score is needed for a HELOC?

  In general, you’ll need a credit score of at least 620 to be approved for a HELOC — although specific requirements will vary by lender. Even though you’re drawing upon the equity of your home, lenders will still want to see that you can manage a line of credit.

• Do I have to use the same lender as my mortgage?

  No, you don’t have to get a HELOC from the same lender as your mortgage. But, you may want to check with your current lender to see if you can get a special deal as an existing customer.

• Can I increase my HELOC limit?

  You can, but you’ll have to apply for it. Because most lines of credit are capped when the HELOC is initially processed, you can’t simply ask to have an increase — even if you have the equity.

• Can I refinance a HELOC?

  Yes, you can refinance your HELOC. Many homeowners choose to refinance once the draw period is over, and the repayment period begins. Here are the four ways to refinance your HELOC:

  • Request a loan modification. The lender can change the loan terms to help make your monthly payments more affordable.
  • Get a new HELOC. You can get a new line of credit to pay off your existing HELOC balance to postpone the repayment period. But the longer you put off repaying the principal, the most interest it’ll cost.
  • Get a new home equity loan. You can pay off your HELOC balance with a fixed-rate home equity loan. It’ll put you in the same boat as getting a new HELOC — you’ll pay more interest in the long run.
  • Refinance your mortgage and HELOC together. By refinancing the combined amount of both your first mortgage and your HELOC balance, you can reduce your monthly payment. But you’ll need to pay closing costs again, and it’ll take longer to pay off your first mortgage.

• How long is a typical term for a home equity line of credit?

  Most home equity lines of credit have 25-year terms. The first five to 10 years are the draw period when you can withdraw funds. You’ll usually only have to make payments on interest during this time, though some lenders will allow you to make payments toward your principal as well. The latter 15 to 20 years are the repayment period, in which you’re responsible for paying the borrowed amount back in full, including interest.

• Can I pay off my HELOC early?

  Absolutely. If you pay off your home equity line of credit well before the repayment period is over, the lender will typically give you the option to either close the account or keep it open for future withdrawals.